Reading 53: General Principles of Credit Analysis-LOS f 习题 interpret, structure, 2011, corporate, class

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Session 14: Fixed Income: Valuation Concepts
Reading 53: General Principles of Credit Analysis

LOS f: Explain and interpret the typical elements of the corporate structure and debt structure of a high-yield issuer and the effect of these elements on the risk position of the lender.

 

 

All of the following are characteristics of bank debt EXCEPT:

A) Banks have a high priority over the assets of the firm.

B) Bank debt tends to have a principal value that is indexed to the rate of inflation.

C) Bank debt is usually floating rate debt.

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Bank debt tends NOT to have a floating principal value.

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High yield debt structures will least likely have which of the following characteristics?

A) Well collateralized senior debt.

B) Bank debt.

C) Payment-in-kind bonds.

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It is unlikely that high yield debt will be well collateralized. If a high yield issue is collateralized, the collateral will be on an uncertain nature.

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Which of the following statements is most accurate regarding the issuance of high yield debt under a holding company structure?

A) The analysis of subsidiary financial ratios and performance is unimportant because the debt repayment is made from the parent's cash flows.

B) Debt is borrowed at the subsidiary level and funds to pay the obligation are obtained from the parent company.

C) Debt is borrowed at the parent company level and funds to pay the obligation are obtained from operating subsidiaries.

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Debt is borrowed at the parent company level and funds to pay the obligation are obtained from operating subsidiaries.

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Which of the following is NOT a feature of bank debt?

A) Bank debt generally has priority over other debt holders on the firm's assets.

B) The interest rate on bank loans is generally a floating rate.

C) Bank loan contracts generally have little or no negative covenants.

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Bank loan contracts usually contain several negative covenants. Furthermore, bank debt is generally short-term, variable rate, and higher priority relative to other debt holders.

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Which of the following statements regarding the debt structure of a high-yield issuer is least accurate?

A) High yield issuers rely on bank loans to a greater extent than investment-grade issuers.

B) Senior bondholder claims are subordinate to claims of bank loans.

C) A high-yield issuer can rely on a high-interest bank loan to provide liquidity if the firm has sufficient assets to cover at least 70% of the bank's claim.

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A bank will not grant a high-yield issuer a loan unless it has sufficient assets to cover the full loan amount. If the high-yield issuer cannot meet this requirement then it must defer to bridge loans and/or reset notes.

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Which of the following debt obligations exposes the firm to the risk of illiquidity due to rising interest rates?

A) Reset notes.

B) Subordinated fixed-rate debt.

C) Bridge loans.

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A reset note is a debt obligation where the coupon interest rate is reset periodically. As a result, the analyst needs to assess the impact that rising interest rates would have on the firm’s ability to honor these security contracts.

Subordinated fixed-rate debt is debt that is paid after other more senior debt is paid off.

A bridge loan is a short-term loan made in anticipation of intermediate-term and long-term financing.

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When analyzing the credit risk of a holding company, it is important to understand:

A) the corporate structure.

B) the diversity of the subsidiaries.

C) the lines of succession.

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It is important to understand the corporate structure so the analyst can determine how cash is passed from subsidiaries to the parent company and to other subsidiaries.

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Which of the following statements regarding the analysis of covenants for high-yield issuers is least accurate?

A) An analyst should examine whether a no contest clause exists that may change the priority of the claims of the firm's debtholders.

B) An analysis of covenants is more critical for high-yield issuers than for investment grade issuers.

C) Covenants provide important insight into the issuing company's strategy.

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It is especially important to analyze the covenant of a high yield issuer to gain insight into corporate strategy.

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When analyzing the credit risk of the holding company, it is critical for the analyst to focus on all of the following EXCEPT:

A) the cash flows generated by the subsidiary.

B) ratio analysis of the parent company.

C) how cash flows move between subsidiaries.

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The ratio analysis of the parent company provides little insight into the financial health of the company since the cash flows come from the subsidiary units of the parent company.

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Which of the following statements regarding loan covenants is least accurate?

A) Empirical studies have found the returns of high-yield bonds to be more highly correlated with equity returns than with returns on investment grade bonds.

B) Banks have a higher priority claim over a firm's assets.

C) Loan covenant analysis is seldom used in the analysis of high-yield issues.

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Loan covenant analysis is especially important in the analysis of high-yield issues. Typically restrictive covenants are used to limit the corporate manager’s ability to participate in more speculative investments. The intentions of management may be revealed by their objections to certain covenants that they may interpret as “too restrictive.” Both of the other statements are true.